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A Fibonacci strategy for day trading forex uses a series of numbers, ratios and patterns to establish entry and exit points. We’ll explain how to use Fibonacci retracement levels and extensions to identify support and resistance areas, plus profit taking targets. Also, we’ll consider what you need from a broker for Fibonacci forex trading, from formulas and analysis software to tutorial videos. The Fibonacci Numbers Named after the Italian mathematician Leonardo Fibonacci, the sequence of infinite progressive numbers is calculated by summing the preceding two figures: 0, 1, 1, 2, 3, 5, 8, 13, 21, etc. Yet for the purpose of trading forex, it’s not the numbers themselves that we’re interested in, but the difference between them. Setting Up A Fibonacci Trading Strategy The basic premise is that in a market uptrend, you buy on a retracement at a Fibonacci support level, while during a downtrend, you sell at a Fibonacci resistance level. So, before you turn to the numbers and patterns, identify which direction the market is trending. Then to enable you to apply the markers, identify the Swing High and Swing Low points on your charting software. Retracements The theory behind Fibonacci retracements is that after a significant market swing, price will return at least in part, to a particular point, before it continues in its initial direction. So in practice, the numbers and formulas that feed into your retracement levels may allow you to predict future price points. A normal Fibonacci forex trading strategy will see you draw three crucial retracement levels at; 38.2 percent, 50 percent and 61.8 percent. Plot these three horizontal lines on your chart software and you’ll see where the market could return to before it resumes in the direction of the original trend. Note your top level, in this case .618, should not fail. Extensions The next step is supplementing your forex trading strategy with extension levels. Extensions use Fibonacci numbers and patterns to determine profit taking points. Extensions continue past the 100% mark and indicate possible exits in line with the trend. For the purposes of using Fibonacci numbers for day trading forex, the key extension points consist of 61.8%, 261.8% and 423.6%. Fibonacci Forex Trading Strategies In Action Examples of forex trading strategies that use Fibonacci ratios include: Buying close to the 50 percent point with a stop-loss order just under the 61.8 percent mark Buying close to the 38.2 percent retracement point with a stop-loss order just under the 50 percent mark In a sell position towards the top of a substantial swing, using the Fibonacci retracement levels as profit collecting points Broker Tools When trading using Fibonacci strategies, the numbers, formulas, ratios and patterns can appear daunting. However, advanced charting software will do the heavy lifting for you, offering retracement and extension level tools. So make sure you choose a broker whose software you’re comfortable using. As with learning any new forex strategy, the more resources you can get your hands on the better. Therefore, it’s worth exploring whether a broker offers any Fibonacci forex strategy guidance, be it through PDFs or tutorial videos. YouTube can also be a great way to see the numbers and patterns being applied in real life examples. For further guidance, see our forex broker reviews. Final Word Trading forex with Fibonacci strategies relies on ratios and formulas. The benefit of which is that it can help leave emotions at the door. However, every trader is different and there are no guaranteed returns with a Fibonacci strategy. Instead consider retracements and extensions as tools to help inform your broader market angle. FAQ When is the best time to use a Fibonacci forex trading strategy? The Fibonacci technique is most effective when the market is trending. What do you need from a broker to use a Fibonnaci strategy? Top brokers will provide easy-to-use software with dedicated retracement and extension tools. What's the best way to understand the Fibonacci ratios? Before you start trading forex with real money, open a demo account at a broker and play around with the Fibonacci numbers, patterns and formulas. What are the limitations of using a Fibonacci strategy? Fibonacci levels cannot pinpoint an exact entry level. They only provide an estimated entry area. Can a Fibonacci strategy work alongside other techniques? Yes, forex trading using Fibonacci & Elliott wave PDFs are one good example.